POLICY BRIEF

Greening the Financial System

of Pakistan
Authors:

Kirthisri Rajatha Wijeweera

At UNDP, Kirthisri is a senior economist

with public and private sector experience
of working both in Sri Lanka and
internationally. Currently, he serves as
Advisor, Nature Performance Debt
Instruments, at UNDP. Kirthisri has over 15
years' of experience working with
multilateral development agencies such as
UNDP, IMF, World Bank and ADB, with
expertise in public finance management,
development policy, and sustainable
investments, as well as experience in
banking and finance industries.
© Pexels/ Akil Mazumder

Unlocking Green Finance

Hamid Rashid
Hamid is currently working as Climate
Financing Expert for UNDP Pakistan. He
orchestrated strategies and instruments for
greening the financial system of Pakistan
and actively contributed to the
development, structure, and deployment of
climate financing tools. With over 15 years of
experience, he provided transaction
advisory on 50+ renewable energy
transactions through market assessments,
feasibility studies, bankable financial
modelling, due diligence, business plans,
negotiations, and contract finalisation. His
expertise led to successful project financing
from banks and Development Financial
Institutions (DFIs).
The financial sector plays a crucial
role in promoting environmentally
sustainable and socially responsible
investment. Banks have already
started to focus their attention on
the commercial opportunities associ-
ated with lending and financial ser-
vices that facilitate climate change
impact projects. Pakistan’s success
lies in the transformation from tradi-
tional industries to green industries,
which is only possible through green-
ing its financial system. Key priority ar-
eas in this regard include transforma-
tion to clean energy, energy conser-
vation, clean water, and electric vehi-
cles (EVs), among others.
The financial system of Pakistan is
headed by the State Bank of Pakistan
(SBP), and is composed of commer-
cial banks and a mix of Non-Bank
Financial Institutions including
Development Financial Institutions
(DFIs), investment banks, housing fi-
nance companies, leasing companies,
modarabas and mutual funds, bro-
kerage houses, and insurance com-
panies.

01
 Green Banking Products that ultimately support the transition to a low-carbon
and sustainable economy. In recent years, many coun-
tries have started to take measures to promote green fi-
Retail Banking
nance development across the banking sector. These
Green Mortgage
Green Consumer
mainly include introduction of green instruments in retail
Loans banking, investment banking, corporate banking, and in-
Green Car Lease
Green Credit Card
surance. The operation of the Green Financial System
Investment Banking
Green Savings (GFS) depends on concrete financial instruments. The de-
Sustainable sign of financial contracts is critical to enabling commer-
Investment
Green Funds cially sustainable green finance that supports economic
Green Bonds sustainability. The policy makers and regulators must
Eco Funds Corporate Banking work in tandem to manage the micro and macro pruden-
Carbon Funds Green Project Finance
Carbon Finance
tial risks arising out of climate change and simultaneously
Green Corporate Loans shift the playing field towards green finance. The issu-
Green Securitization ance of Green Banking Guidelines by SBP1 is an impor-
Green Venture Capital
Insurance & Private Equity tant step toward greening the financial system.
Electric Car Insurance
Introduction of green financial standards, green finance
Catastrophe Insurance
Green Insurance incentive mechanisms, green financial instruments, inter-
Insurance for national green finance cooperation, and green financial
Renewable Energy
Projects information disclosure and monitoring are the main pil-
lars of a GFS.

Pillars of Green Financial System

Green Finance
Standards
Green Financial
Green finance includes all lending and Instruments
investment that contributes to climate and Markets Green Finance
mitigation, climate adaptation and resilience, and Incentive
Mechanisms
other environmental objectives – including International
biodiversity management. Green
Finance Green
Cooperation Financial
Information
Disclosure
Green finance involves the integration of environmental
considerations into financial decision-making processes

Business Case for Climate Finance

Pakistan’s Climate Targets
Pakistan’s Nationally Determined Contributions 2021
(NDCs) set a cumulative and ambitious conditional tar-
get of an overall 50 percent reduction in its projected
emissions by 2030, with 15 percent from the country’s
own resources, and 35 percent subject to provision of in-
ternational finance amounting to US$101 billion just for
energy transition.2 To reach the target, Pakistan aims to
shift to 60 percent renewable energy (RE), and 30 per-

1. State Bank of Pakistan. (2017). Green Banking Guidelines. INFRASTRUCTURE, HOUSING & SME FINANCE DEPARTMENT. Retrieved from
https://www.sbp.org.pk/smefd/circulars/2017/C8-Annex.pdf

02
cent EVs by 2030 and completely ban imported coal, Voluntary and Conditional Reduction of 50%
while expanding nature-based solutions. A GFS in the below its projected BAU emissions by 2030
country can significantly support the achievement of
these targets.

Global Outlook & Climate Finance BAU with no

intervention
Trajectory 1
15%
in Pakistan
Trajectory 1
Climate finance involves financial resources invested in 35%
climate change mitigation and adaptation measures
through financial instruments including loans, grants and
guarantees. 8.7% less than
projected

More than 60 percent of Global Climate Finance is con-

sumed by East Asia & Pacific, and Western Europe,
whereas the South Asian region, including Pakistan, con-
sumes only 4.7 percent of global climate finance.4

Area Sector3 Projects

Energy Debt or equity finance to RE, and energy efficiency
Forestry and other Debt or equity finance to agroforestry, and eco-tourism
land use
Sustainable Transport Debt or equity finance to public transport Public-Private
Partnerships (PPPs), including EVs
Waste management Debt or equity finance to waste management PPPs
Mitigation Industrial processes Loans or equity investments in companies addressing climate change
needs through their products and services
Agriculture Credit facilities for investments in climate-smart agriculture
(especially large scale, less so for smallholder farmers)
Food security (agriculture, Debt or equity finance to irrigation PPPs, credit facilities for
livestock, and fisheries) investments in climate-smart agriculture
Water supply Debt or equity finance to water supply and distribution PPPs
and sanitation
Public health Debt or equity finance to health-care PPPs
Biodiversity, forestry, and Debt or equity finance to forest management PPPs or related
watershed management eco-tourism opportunities
Coastal zone protection Debt or equity finance to coastal protection and marine resource
and marine resources management PPPs or related eco-tourism opportunities
Critical infrastructure Debt or equity finance to infrastructure PPPs (to the extent that tariffs
Adaptation and spatial planning are feasible for the use of such infrastructure)
Disaster risk reduction Debt or equity finance to providers of disaster risk insurance
Energy Debt or equity finance to RE and energy efficiency projects
Transport and urban Debt or equity finance to public transport PPPs or sustainable real estate
development development
Tourism Debt or equity finance to eco-tourism operators

2. Government of Pakistan. (2021). Updated Nationally Determined Contributions. Retrieved from https://unfccc.int/sites/default/files/NDC/2022-
06/Pakistan%20Updated%20NDC%202021.pdf
3. UNFCCC. (2023). Guidebook on How to Access Climate Finance for Member States of the Association of Southeast Asian Nations. Retrieved from
https://www.undp.org/sites/g/files/zskgke326/files/2023-03/J0008_UNFCCC_NBF_ASEAN_Guidebook_FINAL_AW_digital.pdf

03
In order to help developing countries cope with the ad-
verse effects of climate change, the global community MDB’s climate financing to Pakistan
has developed global climate financing initiatives such as (US$ Million)
the Green Climate Fund (GCF), Global Environment 3,000
Fund (GEF), and Adaptation Fund (AF). The broader ob- 2,704
jective of these initiatives is to provide funds to develop- 2,500

ing countries to mitigate or adapt to climatic change. 2,000

Pakistan has secured very limited access to international
climate finance. 1,500 1,305 1,294
1,018 944
1,000
673

3.8 4.1 500

0
2016 2017 2018 2019 2020 2021

Source: Source: EBRD

vestments. The Government of Pakistan (GoP) can ex-

56 plore the following options to do so:
USD 195
a. Issue nature-based debt swaps, e.g. accelerate the
million
tree planation/ reforestation program;
131 b. Work with multilateral and bilateral DFIs to use car-
bon-trading provisions in the 2015 Paris Agreement to
finance the decommissioning of heavily polluting
coal-fired plants;

c. Stressing climate change priorities in sectoral strate-

Green Climate Fund (GCF) - 4 Projects
Global Environment (GEF) - 18 Projects
Gorest Carbon Partjership Facility (FCPF) - 1 Project
Adaptation Fund - 1 Project.
* For sources, please see page 15
Source: Author’s compilation
Climate Financing to Reduce Greenhouse
Gas (GHG) Emissions
Climate finance instruments and mechanisms include
green bonds (for new investments in RE), blue bonds
(that may include sovereign debt restructuring for ex-
panded maritime carbon sinks), brown bonds (for de-
commissioning of land-based carbon emitters), equity in-
vestment, construction-phase loans, grants, and guaran-
tees (such as political risk and credit guarantees that can
cover losses in the event of debt service default). Major
climate finance providers include project sponsors, envi-
ronmental, social, and governance (ESG) funds, commer-
cial banks, bilateral donors, multilateral development
banks or institutions, and guarantee agencies. Achieving
GHG emissions’ reduction targets will require Pakistan to
develop an innovative strategy which targets external cli-
mate finance for, both, RE and other climate change in-
gies to identify emissions, and reducing opportunities
such as mitigating crop burning by investment in
better planting technologies;
d. Converting Pakistan’s NDCs 2021 into a comprehen-
sive document for climate investors;
e. Refining domestic guidelines for green bonds to mini-
mise burdens on investors, while assuring that green
bond sale proceeds contribute to climate mitigation
or adaptation;
f. Refine domestic guidelines for green bonds to mini-
mize burden on investors, while assuring that green
bond sale proceeds contribute to climate mitigation
or adaptation;
g. In order to attract private domestic or foreign invest-
ment for RE, continue to improve Pakistan’s legal and
institutional framework for PPPs;
h. Reach out to multilateral/ bilateral DFIs to seek
concessional climate finance for appropriate climate
projects.

4. Climate Policy Iniatitve. (2021). Global Landscape of Climate Finance. Retrieved from https://www.climatepolicyinitiative.org/wp-content/uploads/2021/10/Full-report-Global-
Landscape-of-Climate-Finance-2021.pdf

04
Options for Climate Finance in Pakistan
Pakistan's financial needs remain high, given the coun-
try's vulnerability to climate change, and capital-
intensive transition to decarbonize the economy. The ta-
ble below provides some public and private sectors, do-
mestic and international sources, and instruments for cli-
mate finance5:

© Freepik

Category Origin Source Funding Instruments

Green Climate Fund Grants; Concessional loans;
(GCF) Guarantees; Equity;
Forestry and other Global Environment Facility Grants
land use (GEF )
Climate Investment Fund Grants; Concessional loans.
Multilateral (CIF)
climate funds Least Developed Countries Fund/ Grants
Special Climate Change Fund
International
Adaptation Fund (AF ) Grants

Forest Carbon Partnership Grants; Results-based payments.

Facility/REDD+
Public MDBs ADB, AIIB, IFC Grants; Concessional loans;
Guarantees; Equity;
Bilateral climate Bilateral Development Agencies, Grants; Concessional loans;
finance Government Ministries Guarantees.
National budgets Climate budget Funding

National climate Funding from government budget, Grants, Concessional loans,

Domestic
funds international donors Guarantees; Equity
Carbon pricing Carbon taxes or selling emission Govt. Investment in climate
permits projects
Commercial banks Banking sector alliance Concessional loans; Debt, Equity
(NZBA, GISD), HBL, BoP, JS Bank
Private equity Acumen Fund, JS Private Equity, Equity, Mezzanine debt.
International/ funds Berkeley Energy
Domestic
Incubators, Lakson Investments VC, Invest2 Convertible notes; Preferred
Private accelerators and Innovate, Clean Energy Trust equity; Ordinary equity
VC funds

Tapping Green/Concessional Financing sued the Medium Term Debt Management Strategy
under Medium Term Debt Management 6
(MTDS) FY23- FY26 reflecting the optimum combination
Strategy of borrowing from various sources. MTDS also provides
strategic guidelines for green/concessional financing ex-
Ministry of Finance’s Debt Management Office has is- ternal financing from bilateral and multilateral develop-

5. UNFCCC. (2023). Guidebook on How to Access Climate Finance for Member States of the Association of Southeast Asian Nations. Retrieved from
https://www.undp.org/sites/g/files/zskgke326/files/2023-03/J0008_UNFCCC_NBF_ASEAN_Guidebook_FINAL_AW_digital.pdf
6. Government of Pakistan. (2023). Medium Term Debt Management Strategy (FY23-FY26). Debt Management Office. Retrieved from
https://www.finance.gov.pk/publications/MTDS_FY23_FY26.pdf

05
ment partners and to tap other avenues within
International Capital Markets (ICM) like ESG bonds,
green bonds, sustainability linked bonds, and gender
bonds, among others, to benefit from favourable terms
and conditions of these facilitates and instruments.
Keeping in view the high interest rate environment, the
Government of Pakistan (GoP) is avoiding fixed rate in-
struments to minimize its borrowing costs. Therefore, the
government intends to continue its partnership with in-
ternational development partners to take advantage of
concessional/semi-concessional climate funding. These
loans provide maximum flexibility to the borrower in the
choice of grace period, final maturity, and amortization
structure.

Debt-for-Nature Swap
The Government of Pakistan should also focus on
debt-for-nature swaps. A debt-for-nature swap is an
agreement between a debtor and creditor where the
repayment obligations of an existing public debt are
suspended, reduced, cancelled, or otherwise
restructured, with the funds allocated instead to
achieving domestic biodiversity outcomes. This
lowers foreign debt obligations and provides a net
improvement in a government’s fiscal position. It
should be considered as part of a continuum of
policy reforms that will support the Government of
Pakistan in addressing long-term financing needs,
accessing new sources of green finance, identifying
and resolving obstacles, and promoting new avenues
for foreign investment. Ecuador struck the biggest
deal of its kind i.e. refinancing $1.6 billion of its
commercial debt at a discount in exchange for a
consistent revenue stream for conservation around
the Galápagos Islands. Similarly, Barbados has
completed a debt conversion for nature backed by a
$150 million guarantee from the Inter-American
Development Bank (IDB) and The Nature
Conservancy (TNC), allowing the country to reduce
borrowing costs and use savings to finance a long-
term marine conservation program.

Climate-smart Finance Systems

Pakistan’s financial sector is governed by the SBP and
Securities and Exchange Commission of Pakistan (SECP). Financial System of Pakistan
The financial sector of Pakistan comprises of commercial
banks, DFIs, microfinance banks (MFBs), exchange com-
State Bank of Pakistan
panies, payment service operators/payment system pro-
viders, and electronic money institutions (EMIs) which
are SBP regulated entities, while non-bank financial insti-
tutions and insurance companies are SECP-regulated en-
tities. In addition, the Central Directorate of National
Savings (CDNS) mobilizes savings from general public to
meet financing needs of the government. The figure be-
low gives an overview of the financial system of Pakistan.

Financial Institutions
06

Markets

• PRISM Infrastructure • Banks (33)

• RAAST • MFB’s (11)
• Exchange • Money • DFI’s (9)
PSOs/PSPs Foreign
Exchange • Exchange
• EMIs (5) Derivatives Companies
Credit
Bureaus (2)

© 2014 Bloomberg Finance LP

06
 b. Increase transparency and disclosure: Investors need
Securities & Exchange Commission of Pakistan clear and reliable information on the environmental
impact of their investments in order to make in-
formed decisions.

c. Develop green financial products: Financial institu-

tions should develop new and innovative financial
products, such as green bonds, green loans, and
green investment funds, to channel capital towards
sustainable investments.
Financial Institutions
06

Markets
d. Build capacity and expertise: This can include train-
• National Infrastructure • Insurance (40)
ing programs for financial professionals, as well as re-
Clearing Co • NBFCs (49) search and development of new financial tools and
(NCC) • Pakistan techniques.
• Leasing (4)
• Central Stock
Exchange • Modaraba (27)
Depository
Company (PSX) • AMCs/IA (28) e. Foster collaboration: Collaboration between govern-
(CDC) • Pakistan • Funds (312)
ments, financial institutions, and other stakeholders is
Mercantile • REITs (5)
Exchange • PE/VCF (5)
essential to facilitate the transition to a GFS. This
(PMX) • PFM (9) could include partnerships to develop new financial
• House Finance products, joint research initiatives, and information-
Companies (4) sharing networks.

Implementation of International
Transition to a Green Financial System Best Practices

Green finance has not been able to reach the scale re-
quired due to lack of green financial systems as well as in-
stitutional barriers inside and outside of the financial sys-
tem. There is misalignment between financial sector poli-
cies and incentives for climate and environmental objec-
tives. Here are some steps that can be taken to facilitate
the transition to a Green Financial System (GFS):
a. Establish a clear policy framework: This could include
measures such as carbon pricing, subsidies for RE pro-
jects, and tax incentives for green investments.
The international experience of green finance develop-
ment suggests several high-level principles for Pakistan in-
cluding:
a. Integration of Green finance in Economic Strategy:
In order to integrate green finance into economic
strategy, governments and financial institutions can
take a number of steps that include development of
policies and regulatory frameworks that incentivize
and encourage green investments, setting targets and
standards for green finance and sustainability, en-

Green Financing System

Provision of finance Green credits for Increased demand Creation of more Good for planet, More lending for
for companies to environmental for “green” goods jobs more economic businesses, and green projects and
produce/invest in products fuels sustainable activity and more economic growth reduction in CO2
greener products, growth prosperity emissions
services and
practices using
innovative solutions

07
 couraging the development of green financial prod-
ucts and markets, providing technical assistance and
capacity building to financial institutions and inves-
tors, and building partnerships and collaborations
among governments, financial institutions, and other
stakeholders to mobilize finance for green invest-
ments.
b. Financial Reforms for Green Finance: Focus on po-
lices and incentives to encourage green investments.
Further, inclusion of sustainability principles in finan-
cial institutions, environmental disclosure and capac-
ity-building of financial institutions and investors,
building knowledge and expertise in environmental
Regulatory Framework
Overview of the Existing Framework for
Green Financing
Pakistan has taken steps to develop guidelines and poli-
cies on climate or green financing to promote sustain-
able development, a summary can be found below.
Climate Change and Green Financing: Policies and Guidelines
National Climate Change Policy (2012): The policy
was developed to address the impacts of climate
change on Pakistan and promote low-carbon
development. The policy aims to reduce GHG
emissions, increase the use of RE, and promote
sustainable agriculture and forestry.
National Financial Inclusion Strategy (2015)7: The
strategy recognizes the need for financial inclusion in
promoting sustainable development. It aims to
increase access to financial services for all segments
of society, including those in rural areas and for
women entrepreneurs.
State Bank of Pakistan Green Banking Guidelines
(2017): The SBP issued these guidelines to promote
sustainable banking practices. However, there is a
need to issue immediate direction of issuance of
green financing and use of green instruments for
commercial banks of Pakistan.
08
risk assessment, and green investments can support a
transition to the green economy.
c. Participation in International Cooperation:
International cooperation for greening the financial
system is critical for promoting sustainable economic
growth, reducing the negative environmental impacts
of economic activities, and addressing global environ-
mental challenges such as climate change.
International cooperation can support the develop-
ment and implementation of common standards and
best practices for green finance, facilitate the sharing
of knowledge and expertise, and mobilize resources
towards sustainable investments.
These policies and guidelines demonstrate Pakistan's
commitment to promoting sustainable development and
addressing the challenges posed by climate change.
However, there is still much room for improvement in
terms of implementation and enforcement of these poli-
cies, as well as for developing a comprehensive frame-
work for green financing.
State Bank of Pakistan Financing Scheme for
Renewable Energy (2016): As part of the Green
Banking initiative, State Bank issued this scheme with
the objective to promote RE projects in the country
by providing financing for RE projects at a
concessional rate of 6%. However, the scheme is
currently in-active and banks are not even issuing
term-sheets for this facility.
SECP Guidelines for Green Bonds Issuance in
Pakistan: The guidelines aim to promote sustainable
and environmentally responsible investment
practices by providing a framework for the issuance
and management of green bonds.
National Electric Vehicle Policy (2019): The policy
aims to promote the use of EV in Pakistan to reduce
GHG emissions and promote energy security. It
includes incentives for the production and use of EV,
such as reduced taxes and import duties.

Pakistan’s Global Commitments towards
SDGs
Pakistan has made significant progress in aligning its poli-
cies with the Sustainable Development Goals (SDGs)
and relevant global/regional commitments. These in-
clude:
Fiscal Policies
National Action Plan on Climate Change: Pakistan has
developed a National Action Plan on Climate Change
that outlines its commitments to address climate change
and reduce carbon emissions. The plan includes targets
for RE, energy efficiency, and forest conservation, among
other measures.
Pakistan Vision 2025: Pakistan Vision 2025 is a long-term
development plan that aims to promote sustainable eco-
nomic growth and development in the country. The plan
includes targets for poverty reduction, access to educa-
tion and healthcare, and environmental sustainability,
among other goals.
Paris Agreement on Climate Change: Pakistan has rati-
fied the Paris Agreement on Climate Change and submit-
ted its NDCs that state the country’s climate mitigation
and adaptation targets.
SDGs: Pakistan has made progress towards achieving the
SDGs, including goals related to poverty reduction, gen-
der equality, access to education, healthcare, and envi-
ronmental sustainability.
South Asia Co-operative Environment Programme
(SACEP): Pakistan is a member of SACEP, a regional inter-
governmental organization that promotes cooperation
7. State Bank of Pakistan. (2015). National Financial Inclusion Strategy Pakistan. Retrieved from https://www.sbp.org.pk/ACMFD/National-Financial-Inclusion-Strategy-Pakistan.pdf
© Pexels/ Kelly
and collaboration on environmental issues in South Asia.
There is still much work to be done to address chal-
lenges such as poverty, inequality, and environmental
degradation, and to achieve sustainable and inclusive de-
velopment in the country.
Here are some fiscal policies that can be used to support
the development of a GFS:
Tax incentives and Credits: Governments can provide
tax incentives for green investments including tax credits
or accelerated depreciation for green investments, which
can help attract private sector investment and promote
sustainable economic growth.
Carbon Pricing: Governments can introduce carbon pric-
ing mechanisms such as a carbon tax or a cap-and-trade
system, to incentivize the reduction of GHG emissions.
Subsidies: Governments can provide subsidies for envi-
ronmentally-friendly projects which can help support
the development of green projects and encourage the
transition to a low-carbon economy.
Green public procurement: Governments can adopt
green public procurement policies which require the pur-
chase of environmentally-friendly products and services.
Strategic Initiatives for GFS
The following public sector initiatives are being pro-
posed for greening the financial system of Pakistan:
09
 Initiative
Special Taskforce on
Green Finance
International Green
Finance Networks
Alignment with the Paris
Agreement Commitments
National Climate
Finance Strategy
Green Finance Roadmap
for Financial Sector
Climate related Environmental
Risk Assessment
Environmental Disclosures
National Green Taxonomy
Greening of SBP Activities
Greening Govt. DFI’s
Pakistan Green
Development Bank
Green Corporate Bond
Green Sovereign Bond
Blended Finance
Stakeholders Implementation
MOF, SBP, Long-term strategic direction to green the overall financial system and
SECP developments needed to advance the countries’ green finance agenda
MOF, SBP, Participation in international networks to facilitate knowledge sharing
SECP and collaboration
MOF, SBP, Encouraging financial institutions and financial system stakeholders to
MOCC consider the Paris alignment of their portfolios, businesses and strategy
MOF, MOCC To secure local, national or international financing that is drawn from
public, private and alternative innovative sources to support mitigation
and adaptation actions
MOF, MOCC, Strategic framework to enable or accelerate Pakistan’s ability to deliver
SBP on its climate and SDGs, while enhancing the financial sector’s
competitiveness and economic resilience
MOF, SBP, Assessement of main climate-related and environmental risks to the
SECP financial sector, including transition and physical risks.
MOF, SBP, Disclosure of current and forward-looking data and analysis, relevant to
SECP their corporate strategy, operations, and performance on relevant
climate and environmental issues
MOF, FBR, A classification system to identify environmentally sustainable economic
SECP activities that substantially contribute to climate or environmental goals
SBP Greening central banks’ activities and operations including monetary
policy and portfolio management
MOF, Govt. Reallocate Govt. DFI’s capital to bridge the financing gap for climate
DFI’s and environmental projects
MOF, MOCC A public, quasi-public or non-profit entity established specifically to
facilitate private investment into domestic low-carbon,
environmentally-resilient infrastructur
SECP Bond proceeds to be applied to finance or verified new and/or existing
eligible climate-related and environmental projects
MOF Marketable debt issued by a central government, where the proceeds
will be used to finance specific green projects
MOF, Govt. Strategic use of public finance for the mobilization of private capital
DFI’s flows towards emerging and frontier markets

Financial Infrastructure Green Investor Network: Create a green investor net-

There is a need to develop the required financial infra-
structure for developing a GFS which includes:
Development of a Carbon Market: A carbon market
should be developed in the country to drive down the
cost of emissions’ reductions through market mecha-
nisms.
Green Ratings and Green Stock Indices: They reveal envi-
ronmental risks, reduce the investment in polluting pro-
jects by increasing their costs, reduce the cost of financ-
ing for green projects, and foster greater green projects
in the country.
work to foster the expertise and capabilities of institu-
tional investors in investing in green industries.
Green Financing Instruments
The operation of the GFS depends on concrete financial
instruments. The design of financial contracts is critical
to enabling a commercially sustainable green finance
that supports economic sustainability. These include:
Green bond: A fixed-income instrument used to sponsor
projects related to climate and the environment. Green
bonds are debts that public or private institutions can is-
sue.

Environmental Cost Analysis: Create a public nonprofit Debt-for-nature swap: A country with outstanding debts
environmental cost-analysis system and database. agrees to allocate a portion of the debt towards environ-

10
mental conservation projects within its borders. The
debt is usually purchased at a discounted rate by a non-
profit organization or government agency. The funds ob-
tained from the debt purchase are then used to finance
projects aimed at preserving natural resources, protect-
ing biodiversity, or supporting sustainable development
initiatives in the debtor country.
Guarantee: Commitment in which the guarantor will en-
sure the debtor meets the goals in climate change miti-
gation and adaptation to debt providers.
Concessional loan: With a more extended repayment pe-
riod and a lower interest rate, so that loan recipient coun-
tries can maximize their efforts in fighting climate
change.
Grant and donation: These are provided to projects re-
lated to climate mitigation and adaptation.
Securities
Securities can play an important role in promoting a GFS
that can be used to finance green projects and support
the development of sustainable finance. Steps in this re-
gard include:
Green bonds: Fixed income securities that are specifi-
cally issued to fund environmentally-friendly projects.
Green bonds are typically certified by a third-party to en-
sure that the proceeds are used for green purposes, and
can attract a wide range of investors, including institu-
tional investors and retail investors. These bonds are
used to fund projects such as RE infrastructure, energy-
efficient buildings, and clean transportation. The govern-
ment could offer credit guarantees or establish a green
bond fund that provides a pool of assets that investors
can draw upon in case of default.
Green equity: Shares of companies that are focused on
environmentally-friendly activities or that have strong
sustainability practices. Investing in green equities can
help to support the development of environmentally-
friendly companies and promote sustainable economic
growth.
Green mutual funds: Investment funds that focus on en-
vironmentally-friendly companies or that invest in green
projects. These funds can attract a wide range of inves-
tors and can be managed by banks, asset managers, or
other financial institutions.
Credit enhancements for green securitization: Tap main-
stream bond markets for green finance. Smaller loans and
assets need to be aggregated and packaged appropri-
© Pexels/ Kritsada Seekham
ately.
Establish dual recourse for green municipal bonds.
Governments can issue green dual resource bonds or rev-
enue bonds with a government guarantee as a backstop.
The primary function of such green dual recourse bond
is to give investors experience in analysing the perfor-
mance of green assets, without exposing them to higher
risks. As the investors become familiar with the green as-
sets’ performance, the market can move to green asset-
backed securities.
Green real estate investment trusts (REITs): investment
trusts that focus on environmentally-friendly real estate
projects, such as green buildings or sustainable infra-
structure. Investing in green REITs can help to promote
sustainable real estate development and support the
transition to a low-carbon economy.
Tax credits for green corporate bonds. There is scope to
support investment in green bonds by allowing tax-free
interest income from green bond investments. This can
be put in place by making green bondholders eligible for
tax credits equal to the total amount of the interest, or a
share of the interest.
Compulsory environmental information disclosure mech-
anism: The government can introduce regulations that re-
quire financial institutions to disclose their environmen-
tal risks and impacts, set targets for reducing carbon emis-
sions, and report on their sustainability performance. For
example, the European Union's Sustainable Finance
Disclosure Regulation requires financial institutions to dis-
close information about their sustainability risks and op-
portunities.
Develop environmentally friendly benchmark equity
and bond indices: These are both connected to policy
goals and enjoy public sector incentives by collaborating
11
with index providers and stock exchanges.
Implementation would require improved data reporting
and accounting.
Promote the establishment of a Green Investors’
Network: A Green Investor Network may increase
investee companies’ preferences for green projects
through pressure from institutional investors including
venture capitalists, and institutional investors who share
a common goal of investing in companies that are devel-
oping innovative solutions to environmental challenges
such as climate change, resource depletion, and pollu-
tion.
Insurance
Here are some ways in which insurance institutions can
support the development of a GFS:
Climate risk insurance: Insurance companies can offer cli-
mate risk insurance to protect individuals, businesses,
and governments against the risks associated with cli-
mate change, such as flooding, drought, and other ex-
treme weather events.
Expanding the scope of green insurance: This would
form a set of comprehensive methods and insurance so-
lutions (e.g., the performance insurance for solar panels
and wind turbines, building insurance for energy and wa-
ter efficiency and usage-based insurance).
Green insurance products: Insurance companies can de-
velop green insurance products to promote sustainable
development. For example, insurers can offer green
building insurance, which provides coverage for environ-
mentally-friendly buildings or insurance for RE projects.
Environmental pollution liability insurance system:
Improving legal liability frameworks, involving local gov-
ernments in the development of environmental liability
insurance, and providing fiscal and taxation support.
ESG integration: Insurance companies can integrate ESG
factors into their underwriting and investment decisions.
This can help to identify and manage climate-related
risks and support the development of sustainable finan-
cial practices.
Sustainable operations: Insurance companies can adopt
sustainable operations practices to reduce their own en-
vironmental footprint and promote sustainable develop-
ment. This can include reducing energy consumption, us-
ing RE sources, and adopting environmentally-friendly
policies and practices.
12
Appraisal and inspection mechanism for environmental
pollution damages and improve the environmental dam-
age compensation system: The insurance industry could
provide technical support and services for environmental
risk appraisal and other insurances.
Sustainable investing: Insurance companies can invest in
environmentally-friendly projects and companies, such
as RE projects or sustainable infrastructure. By investing
in sustainable projects and companies, insurance com-
panies can support the development of a GFS and pro-
mote sustainable economic growth.
Other Regulatory Recommendations
Here are some other policies that needs to be imple-
mented for transitioning to a GFS:
Green investment funds: They play a key role in chan-
nelling capital towards sustainable investments. The gov-
ernment could support the development of green in-
vestment funds by offering tax incentives or providing
seed funding.
Public-private partnerships: They are an effective way to
finance green infrastructure projects, such as RE installa-
tions. The government could take steps to facilitate PPPs
by offering financial incentives or providing technical sup-
port.
Introduction of the priority lending sector: SBP should
introduce priority lending sectors and climate invest-
ments should benefit from a dedicated target.
Government should form policies which promote the
use of RE and EVs for transition away from fossil fuels.
Sustainable investment guidelines: The government can
provide guidelines for financial institutions to invest in
sustainable assets. These include setting standards for en-
vironmentally-friendly investments and promoting in-
vestments that generate positive social and environmen-
tal impacts.
Increase the return on investment of green projects:
This can be done by lowering financing costs and en-
hancing the availability of funds.
Strategic issuance: Issuance of green sovereign bonds
and green municipal bonds can play a key role in financ-
ing sustainable projects.
Public awareness: Raising public awareness about green
financial instruments is important to build demand for
these products. The government could launch a public
awareness campaign that highlights the benefits of in-
vesting in green projects and encourages the use of
green financial instruments.
A coherent green finance system would allow Pakistan to
attract private capital into the green industry, reduce fis-
cal pressure, and enhance economic growth.
Development of Policy for Carbon Trading
Pakistan does not have a comprehensive carbon trading
policy in place. Global landscape of climate change poli-
cies and carbon markets is constantly evolving, and
Pakistan should develop and implement its policies for
carbon trading. To implement a carbon trading policy,
the government should establish regulatory frameworks
and institutions to oversee the process. It's important to
note that implementing a successful carbon trading pol-
icy requires strong institutional capacity, accurate emis-
sions data, stakeholder engagement, and international co-
operation.

Carbon Credit - Success Stories in Pakistan

Sindh-based Delta Blue Carbon, Covering an area of
350,000 hectares a mangrove restoration project has
been verified by Verra. This verification has enabled
the project to list its carbon credits on the Singapore-
based carbon exchange Climate Impact X (CIX).
Ÿ 3.1 Mt CO2 equivalent have been traded in
international voluntary carbon markets, generating
revenue for Sindh of approximately US$14.7
Million
Ÿ The project sold 50,000 tons of carbon-removal
credits at $29.72 per ton through an auction
organized by CIX.
Ÿ In November 2022, the auction, which was
oversubscribed, sold 250,000 tons of credits at
$27.8 per ton (30 per cent of bids were priced at
$35).
Ÿ In the next 20 years, projected revenue for Sindh
will be approx. $200 Million
Quaid-e- Azam Solar, Quaid-e-Azam Solar Power
(Pvt.) Limited is a public-sector for profit company
established by the Government of the Punjab. The
company has been established for the setting up of
renewable energy projects in general and Solar Energy
Power Projects in particular. Quaid-e-Azam Solar
Power (Pvt.) Limited is the first ever utility scale solar
power plant in the country.
Ÿ Quaid-e-Azam Solar Power (Pvt.) Limited has
earned 95,237 CERs for its first operational year
(Feb 2018 – Feb 2019) after registration with CDM
UNFCCC.
Ÿ Net GHG reductions over the lifecycle of the
project (i.e., 25 years) are 2.3 Mt Co2

Green Banking System

The banking sector is a key stakeholder in Pakistan’s fi-
nancial system as well as Pakistan's SDGs achievement by Sector-wise Financing by Banks (PKR Billion)
providing green financing to sustainable industries at
1,521
Energy
low-interest rates to mitigate environmental issues.
Textile
4,027 Individuals
Role of State Bank of Pakistan Agri business
1,782
Pharma & Chemicals
In order to green the financial system of Pakistan, SBP Sugar
can take multiple actions such as developing a roadmap Financial Sector
for the financial industry, devising green credit allocation Cement

policies, developing green taxonomy, and issuing guide- 6 1,072

Automobile
Elecronics
lines for financial institutions on disclosure requirements 44
151
195 Shoes and Leather
(in line with the taskforce on climate-related financial dis- 213
932
337 251 375 Insurance
closures recommendations) and integrating ESG into Others
their business strategy. Here are some ways in which the

13
SBP can promote a GFS in Pakistan:
a. Use asset purchase programs to purchase green
bonds and other environmentally-friendly assets;
b. Use interest rate policies to encourage investment in
environmentally-friendly projects;
c. Establish targets for green re-financing facilities in the
country;
d. Use stress testing to assess the exposure of financial
institutions to climate-related risks;
e. Identify and eliminate the elements in its current
monetary policy that are misaligned with the objec-
tives for a green economy;
f. Use collateral policies to encourage the use of green
collateral. For example, central banks can accept
green bonds or other; environmentally-friendly assets
as collateral for loans, which can increase the de-
mand for these assets;
g. Explore the relationship between monetary policies
and green finance, including developing a better un-
derstanding of the potential alignment of existing
monetary policy tools to green finance, and the pos-
sible effects of environmental degradation and re-
source scarcities on price and financial stability regu-
lations;
h. Work with other central banks and international orga-
nizations to promote the development of a GFS;
i. Develop and improve policies, systems and proce-
dures for environmental and social (E&S) risk manage-
ment;
j. Develop a client E&S risk rating standard to assess
and categorize clients’ E&S risks;
k. Create a mechanism that encourages green credit in-
novation;
l. Improve E&S performances of its own operations;
m. Strengthen capacity-building on green credit, de-
velop and improve green credit;
n. Determine scope of E&S risk due diligence based on
sectors and geographic features of clients or their pro-
jects;
o. Develop a compliance documents list and a compli-
14
ance risk review list on E&S aspects, based on sector-
specific features;
p. Determine sound credit approval authorization and
procedures based on the nature and severity of E&S
risks faced by clients;
q. Improve loan agreements to urge clients to improve
E&S risk management;
r. Disclose green credit strategy and policies, and green
Role of Commercial Banks
Commercial Banks should take the following steps for
Paris alignment of their objectives and to promote a GFS
in the country:
a. Obtain senior-level commitment to align lending
and/or investment portfolios with Paris goals and
SDGs;
b. Publicly communicate ambition and target to achieve
Paris alignment;
c. Join initiatives which have the objective of aligning
with Paris goals;
d. Design plan for delivery of the project, as well as the
mapping of interlinkages with other policy and regu-
lations, e.g., schemes for pricing of emissions;
e. Reduce carbon footprint under their Net Zero Plan.
This includes ‘No New Coal Policy’, ‘No Deforestation
Policy’, reduce exposure to ESG-negative industries;
f. Training and capacity-building for awareness of ESG
including environmental education;
g. Accreditation with GCF and other climate funds to
accelerate climate financing in Pakistan for greening
the financial system of Pakistan;
h. Become a signatory to Green Investment Principles
(GIPs), along with China and 27 other global institu-
tions. It includes seven principles at three levels –
strategy, operations, and innovation for green invest-
ments in the Belt and Road Initiative (BRI);
i. An internationally aligned taxonomy will better sup-
port effective decision-making and response to in-
vestment opportunities that contribute to achieving
national and international environmental objectives;
j. Identify commonly recognized green lending initia-
 tives and launch of green loan management frame-
work;
k. Finance Sustainable Agriculture (Cotton and Food
Security);
l. Green Financing for ‘Recharge Pakistan Program’;
m. Strengthening of ESG systems and policies;
n. Financing for protecting the coastal and marine envi-
ronment;
o. Aligning operations with SBP’s green banking guide-
lines;
p. Establish green banking branches and green opera-
tions units.
Green Banking
Green banking has emerged as an important player in
the fight against climate change. Pakistan is currently at
the very initial stages of Green Banking adoption indicat-
ing a higher margin for improvement on this front. The
SBP must incentivise commercial banking sector for
green finance. Some measures in this regard include:
Polices to tap green finance: Pakistan must design poli-
cies to tap local and international green finance available
for energy efficiency, climate change adaptation, waste
management and sustainable energy investments.
Bonds by private companies: Bond issuance can be
Examples of Green Banks Around the World
California Lending for Energy and Clean Energy Finance
Environmental Needs (CLEEN) Corporation (Australia)
Center (California, U.S.A.)
Green Tech Malaysia Masdar
(Malaysia) (United Arab Emirates)
Rhode Island Infrastructure Bank
(Rhode Island, U.S.A.)
done by private companies or public entities, the private
sector, in particular, must be engaged in order to reach
out to the wider public for green bonds.
Green Sukuk and Euro bonds: Pakistan must design poli-
cies to attract bilateral climate finance by issuing green
Sukuk and Euro bonds. This method is being applied by
many countries, including the United Arab Emirates. In
Pakistan, the Water and Power Development Authority
(WAPDA) has proposed to issue long-term dollar-
denominated green bonds of up to $500 million.
Climate-informed fiscal planning: In addition to green
monetary policy, the government must adopt climate-
informed fiscal planning. This means that it should inte-
grate climate change adaptation and mitigation policies
in its macro-fiscal policies. Climate informed fiscal plan-
ning can be improved by raising awareness among the
masses and parliamentarians.
Grants: Grants play a key role in multilateral and bilateral
financing in climate and environmental space. Grants are
normally provided for non-revenue generating activities
in recipient countries, such as capacity-building, knowl-
edge management, and other programmes. Grants help
in capitalising the financial mechanisms related to adap-
tation, forestry, and environmental preservation.
Across the globe, green banks have been established at
national and sub-national levels to mobilize private in-
vestment in order to meet both domestic targets for RE
deployment and energy efficiency, as well as interna-
tional climate targets for carbon emission reductions.
The Paris Agreement and the falling prices of clean en-
Connecticut Green Bank Hawaii Green Infrastructure Green Finance Organisation
(Connecticut, U.S.A.) Authority (Hawaii, U.S.A.) Japan (Japan)
Montgomery Country Green New Jersey Energy Resilience New York Green Bank
Bank (Maryland, U.S.A.) Bank (New Jersey, U.S.A.) (New York, U.S.A.)
Technology Fund UK Green Investment Bank
(Switzerland) (United Kingdom)
15
ergy technologies and associated cost parity with other Landscape for Green Finance in Pakistan
forms of energy has increased the demand for greater
and new sources of capital for clean energy projects. Wind
Here are some of the examples of green banks around Solar
the globe.8
Tidal
Measuring Carbon Footprint of Geothermal
Bank Loans (CBFL) Biomass
There are new metrics such as CBFL that are emerging to Clean
Green Energy Corridor
Energy
measure carbon footprint of bank lending portfolios. As
part of the way forward, it would be good if banks in Hydrogen
Pakistan adopt these measures and also have regulatory Manufacturing of clean energy plant
measures to improve on this. The IMF ‘Carbon Footprint
Energy Storage
of Bank Loans’9 could be a possible benchmark as would
the work of Guan et al. (2017) that looked at bank spe- Purchase of EVs
cific portfolio for measuring carbon intensity. CBFL is pub-
EV Charging Infrastructure
licly available through the IMF’s Climate Change Clean
Indicators Dashboard (CID). The indicator aims to quan- Transportation Public Transportation
tify the exposure of a country’s banking sector to climate
Energy-efficient equipment
transition risks. The CID, was developed to provide a tool
for policymakers to measure the carbon intensity of bank Process Efficiency
loan portfolios. According to the IMF, the financial sys- Bulk Energy Services
tem needs to help by channelling financing for the tran- Energy
sition to a low-carbon economy and by bolstering cli- Green Building
Efficiency
mate financing considerably from an estimated seven Renovation of Buildings
percent of total funding in 2017 to 30 percent in 2030. In
Disaster Monitoring, &
this regard, Guan et al. (2017) is the most relevant frame-
Emergency Response System
work which measure carbon intensity of loan portfolios
of banks and explores the associated credit risk. It mea- Flood Mitigation
Climate
sures the individual bank’s portfolio carbon intensity Adaptation Drought Management
weighted by shares of loans in all sectors and provides
bank level exposure metric and it focuses on broad sec-
tors with intensive data requirements, including the
bank’s sectoral exposures. The SBP could play an active Value Proposition for Green Banks in Pakistan
role in rolling out necessary measures in consultation
with government and commercial banks. Reduced cost of Financing of
domestic capital underserved
market
Greening Capitalization of Banks
Reduced Meet national
There are new metrics such as CBFL that are emerging to perceived renewable
measure carbon footprint of bank lending portfolios. As financing risk energy targets
part of the way forward, it would be good if banks in
Pakistan adopt these measures and also have regulatory Attract Meet international
international capital
measures to improve on this. The IMF ‘Carbon Footprint investment commitments
of Bank Loans’ could be a possible benchmark as would
the work of Guan et al. (2017) that looked at bank spe-
cific portfolio for measuring carbon intensity. CBFL is pub- transition risks. The CID, was developed to provide a tool
licly available through the IMF’s Climate Change for policymakers to measure the carbon intensity of bank
Indicators Dashboard (CID). The indicator aims to quan- loan portfolios. According to the IMF, the financial sys-
tify the exposure of a country’s banking sector to climate tem needs to help by channelling financing for the tran-

8. OECD. (2015). Green investment banks. Bloomberg Philanthropies. Retrieved from https://www.oecd.org/greengrowth/green-investment-banks.htm
9. International Monetary Fund. (2023). Data for a Greener World: A Guide for Practitioners and Policymakers. Retrieved from https://www.imf.org/-
/media/Files/Publications/Books/2023/English/DFGWGPPEA.ashx

16
sition to a low-carbon economy and by bolstering cli-
mate financing considerably from an estimated seven
percent of total funding in 2017 to 30 percent in 2030. In
this regard, Guan et al. (2017) is the most relevant frame-
work which measure carbon intensity of loan portfolios
of banks and explores the associated credit risk. It mea-
sures the individual bank’s portfolio carbon intensity
weighted by shares of loans in all sectors and provides
bank level exposure metric and it focuses on broad sec-
tors with intensive data requirements, including the
bank’s sectoral exposures. The SBP could play an active
role in rolling out necessary measures in consultation
with government and commercial banks. © Freepik

visage capital commitments from the proposed banking

Value Proposition for Green Banks
in Pakistan
Green banks offer solutions to overcome local financing
barriers for clean energy and can play a significant role in
accelerating low carbon development projects. Due to
their green investment mandate and public source of
capital, green banks can deploy funds in a more flexible
manner that, both, leverages private capital and lowers
the borrowing cost to the ultimate customer. This en-
ables a broader pool of clean energy projects to achieve
economical financing, which makes the projects more
likely to be developed and attracts more investors, di-
recting international sources of capital to local projects.
Green bank financing methods leverage private capital
to fill financing gaps by reducing real and perceived risk
and asymmetrical information. This allows private inves-
tors the chance to learn about a new market opportunity
with the security of a government partnership. As private
lenders gain experience and information about the pro-
cesses, risks, and addressable market size in clean energy,
they can become increasingly comfortable and confi-
dent lending into these markets.
Banking Sector Alliance for
Green Initiatives
Since governments have limited funds for green initia-
tives, therefore there is a need to develop a banking sec-
tor alliance for undertaking green initiatives in the coun-
try. UNDP in this regard is in talks with the leading banks
in Pakistan to form a banking sector alliance. Banking sec-
tor alliance can launch a Climate Resilience fund which
should target executing several SDG-aligned projects
with competitive commercial and social returns whilst in-
creasing resilience to climate change and enhancing sus-
tainable development in the country. The fund may en-
sector alliance, with reciprocal commitments from DFIs
to achieve a minimum domestic capital commitment of
$50 million. These commitments shall then be leveraged
from international institutions and bilateral partners to ar-
rive at a projected $500 million Climate Resilience Fund.
Examples of similar alliances include GISD Alliance’10 and
‘Net Zero Banking Alliance (NZBA)’.11
Setting up of Pakistan Green
Development Bank
There is a need to set up a ‘Pakistan Green Development
Bank’ dedicated to investing in and promoting clean en-
ergy and other environmentally sustainable projects. This
bank shall provide funding and financing to individuals,
businesses, and organizations for RE projects, energy effi-
ciency improvements, and other initiatives that aim to re-
duce GHG emissions and mitigate the impacts of cli-
mate change. The primary goal of this bank should be to
accelerate the transition to a clean energy economy by
increasing investment in sustainable infrastructure and
technologies. The proposed bank should:
1. Issue green bonds, green asset-backed securities, and
other basic financial instruments, foster and nurture a
green finance trading market, and determine the
‘green benchmark interest rate’ for the markets;
2. Serve as a leader in the credit industry, formulate
guidelines related to green industry credits, become
the leading bank in a syndicate for green projects,
channel funds from other financial institutions; and
3. Benefit the nation through its financing capabilities
and talented workforce, provide technical assistance
for financing in the green industry, and cultivate a pro-
fessional staff in the area of green loans.

10. Global Investors for Sustainable Development Alliance. (2023). Global Investors for Sustainable Development. Retrieved from GISD: https://www.gisdalliance.org/
11. Net-Zero Banking Alliance. (2023). Net-Zero Banking Alliance. Retrieved from https://www.unepfi.org/net-zero-banking/

17
Greening the Power Sector
Overview of the Power Sector of Pakistan
An import-driven fossil fuel-based energy is not sustain-
able for Pakistan. Green energy can help Pakistan in over-
coming its perpetual energy crises, by a reduction in de-
pendence on imports and hence reducing the cost of en-
ergy to the country. Charts below show a transition from
existing fossil fuel-based generation to a renewable and
hydel focused energy-mix.
Financing for Green Energy Projects
Although investment in RE and energy efficiency is grow-
ing both internationally and in Pakistan, the scale of in-
vestment does not yet match the scale of financing
needed for Pakistan to reach its internal clean energy tar-
gets. Significant collaborative efforts are required from
various stakeholders, including government, financial in-
stitutions, investors, industry, and research organizations
in order to develop innovative financing solutions to
achieve these targets.
Strong policy settings and incentive structures must be
adopted to enable RE investment to scale up to the re-
quired levels in Pakistan. Dedicated “green” financial in-
stitutions known as green banks are proving to be suc-
cessful models internationally at leveraging public funds
to bring in private capital. Green banks could propel
Pakistan’s solar and wind energy markets and support crit-
Existing Installed Capacity - 2022
1.4% 0.8%
4.2%
43,775
MW
Hydel Thermals Wind Solar
Source: NEPRA
12. State Bank of Pakistan. (2023). Incentive Schemes for SMEs & Other Sectors. Retrieved from https://www.sbp.org.pk/Incen-others/Rene.asp
13. National Electric Power Regulatory Authority. (2023). Competitive Trading Bilateral Contracts Market (CTBCM). Retrieved from https://www.nepra.org.pk/ctbcm.php
18
ical energy- efficiency and climate resilience projects. To
achieve Pakistan’s clean energy and climate goals, an inno-
vative financial institution like a green bank can leverage
limited public funds to reduce capital costs and risk – un-
locking broader private investment in clean energy pro-
jects to scale up the market. In this way, green banks tai-
lor their offerings to match domestic needs and can help
mainstream green investment locally.
SBP Financing Scheme for
Renewable Energy
SBP’s ‘Financing Scheme for Renewable Energy 2016’12
aims to promote RE projects in the country. SBP has also
launched a similar Mudarabah based ‘Islamic Financing
Facility for Renewable Energy (IFRE)’ for Islamic Banking
Institutions (IBIs) and DFIs having authorized Islamic fi-
nancing operations, with similar features. This policy is
currently inactive and there is a need to re-activate this
financing scheme and introduce similar financing
schemes.
Competitive Trading Bilateral Contract
Market (CTBCM)
National Electric Power Regulatory Authority (NEPRA) has
13
recently approved a CTBCM model that provides a
roadmap for opening the wholesale electricity market of
Pakistan, aiming to provide choice to the bulk power con-
Indicative Generation Capacity Expansion -2031
0.6%
19.7%
24.3%
32.5%
9.9%
69,372
MW
37.3%
Bagasses/Biomass Hydel Thermals Wind Solar Bagasses/Biomass
Source: Indicative Generation Capacity Expansion Plan 2022-2031
sumers to purchase electric power from the Distribution
Companies (DISCOs) or a competitive supplier of their
choice. Opening of a wholesale electricity market will re-
sult in injection of greener energy into the system be-
National National and Energy market
cause of a competitive market. climate policies transboundary policies and
energy infrastructure regulations
Climate Finance for RE Projects
Mitigation and adaptation finance, in their current forms,
remain largely untapped. Renewables-based projects Financial sector Policies and Social
could be a prime candidate for these funding opportuni- regulations practices of policies
ties, especially from the newly emerging climate finance financial institutions
architecture. For instance, GCF has become a vital part
of the global climate finance architecture – mobilising
$10 billion during its first replenishment and investing in quently drive energy transition towards a low-carbon
transformational climate projects worth over $40 billion and high-renewable economy. Banks can play an impor-
(including co-financing) in more than 100 countries.14 In tant role in this energy transition, by developing and im-
2019, the World Bank announced it would boost its adap- plementing a new vision on Pakistan’s energy future by re-
15
tation financing to $50 billion by 2025 matching its miti- orienting financing to RE innovations, setting clear objec-
gation funding for the same period. Pakistan should tap tives, and implementing time-bound strategies to exit
international climate finance for RE projects which can from fossil fuels.
provide blended financing facilities resulting in increased
viability of projects. The following policy measures can be taken for transition
to the RE market:
Transition to RE
a. Policy and incentives of indigenous/local manufactur-
Pakistan is heavily reliant on fossil fuels to meet its en- ing of solar modules;
ergy needs in electricity and transport sectors. There is a
need to phase out from this dependence and subse- b. Alignment of RE policies with NDC RE targets;

c. Accelerate competitive bidding auctions in line with

Existing Installed Capacity - 2022 the ‘Indicative Generation Capacity Expansion Plan
2022’;
Fossil Fuels Renewable Energy
d. Organize intensive capacity-building on financial man-
Coal Geothermal
agement provisions, CTBCM process changes, subsi-
Gas Concentrated solar power (CSP) dies, and contract management for RE projects;
Oil Solar PV
Wind onshore e. Develop structured finance products for RE under
Wind offshore the concessional financing framework;
Ocean and tidal energy
f. Identify and work on project readiness facilities for
Micro-Hydropower
GCF transactions to scale up climate finance poten-
tial;
Other Non-Fossil Sources
Biomass – co-firing g. Devise clear methodology for Use-of-System Charges
Biomass – dedicated (UoSC) under wheeling regulations and encourage bi-
Larg hydropower lateral contracting of power;
Nuclear power
Waste to energy
h. Develop long-term renewables-based climate adap-
tation and mitigation plans.

14. Green Climate Fund. (2023). GCF's second replenishment. Retrieved from https://www.greenclimate.fund/about/resource-mobilisation/gcf-2
15. The World Bank. (2019, January 15). World Bank Group Announces $50 billion over Five Years for Climate Adaptation and Resilience. Retrieved from
https://www.worldbank.org/en/news/press-release/2019/01/15/world-bank-group-announces-50-billion-over-five-years-for-climate-adaptation-and-resilience

19
Financing the Transition
Loans/Advances by Asian Banks to Fossil
A study ‘Financing the Just Transition – Powering Asia’s Fuels and Renewables (USD million)
Sustainable Energy Future’ by the Stockholm
16 Fossil Fuels Renewables
Environment Institute (SEI) found that most of the en-
ergy financing of the main banks from the selected Asian 250,000

220,297
countries is predominantly destined for fossil fuels, with

204,007
199,162
195,916
RE only accounting for 0 percent to 26 percent of their
energy financing between 2016 to 2022. Trends found in

163,306
200,000
Asia in the period between 2016 and 2022 are incompati-

152,637
142,074
ble with the recommended pathway of the International
Energy Agency (IEA), that leads to a 1.5° scenario. This sug-
gests that annual reductions in fossil fuel production re- 150,000
quired between 2020 and 2030 are of 11 percent for coal,
4 percent for oil, and 3 percent for fossil. The graph be-
low provide an overview of loans and underwritings by

44,981

36,341
100,000

31,893
Asian banks for the energy sector.

27,919

26,310
20,558
16,940
Financing for RE is also very low and there is an immedi-
ate need to move finances to banks towards RE in order 50,000
to support and finance the transition. Moreover, the fi-
nancial sector in Pakistan does not yet have standardized
and mandatory regulations that explicitly ban fossil fuel
-
investments, nor do they adequately mandate carbon dis-
2016 2017 2018 2019 2020 2021 2022
closure to drive emissions’ reductions across their opera-
tions and value chains.

Conclusion
The world is fighting a losing battle against climate
change and the absence of a comprehensive global deal
on tackling climate change is glaring. Nevertheless, an in-
creasing number of local, national, and regional initiatives
are now underway to put a price on carbon, encourage
energy efficiency, and catalyse green investments.
However, it is clear that a green transformation cannot
happen without large-scale investments in the green
economy and without stopping the ongoing investments
in the dirty economy, that continue to lock in future
GHG emissions, for there is a need to green the financial
system.
Pakistan is in a race against time in meeting its climate
goals, and greening all finance has become imperative.
This requires concerted efforts, a cohesive approach,
and the collective vision of policymakers, regulators, and
actors in the financial system. The way forward is to ac-
celerate the dialogue at the highest level and initiate a
narrative around sustainable finance and, in turn, support
the sustainable growth of the country.

16. Fair Finance Asia. (2022). Financing The Just Transition: Powering Asia's Sustainable Energy Future. Retrieved from https://fairfinanceasia.org/wp-content/uploads/2022/11/Key-
Findings-and-Observations-Financing-the-Just-Transition-Powering-Asias-Sustainability-Energy-Future.pdf

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